[Federal Register: January 13, 2004 (Volume 69, Number 8)]
[Rules and Regulations]
[Page 1895-1904]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13ja04-2]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 7
[Docket No. 04-03]
RIN 1557-AC78
Bank Activities and Operations
AGENCY: Office of the Comptroller of the Currency, Treasury.
ACTION: Final rule.
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SUMMARY: The Office of the Comptroller of the Currency (OCC) is
publishing its final rule amending its visitorial powers regulation in
order to clarify issues that have arisen in connection with the scope
of the OCC's visitorial powers.
EFFECTIVE DATE: February 12, 2004.
FOR FURTHER INFORMATION CONTACT: For questions concerning the final
rule, contact Andra Shuster, Counsel, or Mark Tenhundfeld, Assistant
Director, Legislative and Regulatory Activities Division, (202) 874-
5090.
SUPPLEMENTARY INFORMATION: On February 7, 2003, the OCC published a
notice of proposed rulemaking in the Federal Register (68 FR 6363) to
implement the American Homeownership and Economic Opportunity Act of
2000 (AHEOA) and clarify our visitorial powers regulation (NPRM). In
addition, we proposed to amend parts 5, 7, 9, and 34 of our regulations
for other purposes and to make various technical changes to correct
citations or footnote numbering.
On December 17, 2003, the OCC published a final rule that addressed
all of the foregoing parts of the proposal except visitorial powers (68
FR 70122). This final rule relates solely to the visitorial powers
proposal (proposal).
The OCC received 55 comments on the NPRM. Of these, 53 comments
addressed the visitorial powers proposal. These comments included three
from national banks, one from an operating subsidiary of a national
bank, six from bank holding companies, five from banking trade
associations, two from bank membership organizations, one from a
community group association, two from non-profit consumer groups, one
from a state bank supervisors' association, 30 from state bank
supervisors' offices, one from a securities administrators' membership
organization, and one from a law enforcement association.
While many of the commenters supported the proposal, some were
opposed, and many offered suggestions for changes. For the reasons
discussed later in this preamble, we have adopted the visitorial powers
provisions of the NPRM with certain modifications also described later.
A. Background
Current 12 CFR 7.4000(a) provides that only the OCC or an
authorized representative of the OCC may exercise visitorial powers
with respect to national banks, subject to exceptions provided in
Federal law. Section 7.4000(a) goes on to define the regulatory,
supervisory, and enforcement actions included within our visitorial
powers, while Sec. 7.4000(b) sets out several exceptions to our
exclusive authority that are created by Federal law.\1\
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\1\ Paragraph (c) of 12 CFR 7.4000 clarifies that the OCC owns
reports of examination and addresses a bank's obligations with
respect to these reports. This paragraph is unaffected by this
rulemaking.
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These provisions interpret and implement 12 U.S.C. 484. Paragraph
(a) of that section states--
No national bank shall be subject to any visitorial powers
except as authorized by Federal law, vested in the courts of justice
or such as shall be, or have been exercised or directed by Congress
or by either House thereof or by any committee of Congress or of
either House duly authorized.
Paragraph (b) of the statute then permits lawfully authorized state
auditors or examiners to review a national bank's records ``solely to
ensure compliance with applicable State unclaimed property or escheat
laws upon reasonable cause to believe that the bank has failed to
comply with such laws.''
In recent years, various questions have arisen with respect to the
scope of the OCC's visitorial powers over national banks. In general,
the questions fall into two broad categories: First, what activities
conducted by a national bank are subject to the OCC's exclusive
visitorial powers? Second, what is the meaning of certain exceptions to
the OCC's exclusive visitorial powers that are provided in the statute,
specifically the exception for visitorial powers ``vested in the courts
of justice?''
The NPRM invited comments on proposed amendments to Sec. 7.4000 to
clarify the application of section 484 to both areas.
B. Description of the Proposal
The proposal contained two types of changes to Sec. 7.4000. First,
we proposed to add a new paragraph (3) to Sec. 7.4000(a) that
identifies the scope of the activities of national banks for which the
OCC's visitorial powers are exclusive, pursuant to section 484. The
proposal provided that the OCC has exclusive visitorial authority over
national bank activities that are permissible under Federal law or
regulation or OCC issuance or interpretation, including how those
activities are conducted. Second, we proposed to revise Sec. 7.4000(b)
to clarify the OCC's interpretation of the ``vested in the courts of
justice'' exception. The proposal provided that national banks are
subject to the visitorial power inherently vested in courts and that
the ``vested in the courts of justice'' exception did not create or
expand any authority of states or other governmental entities to
regulate or supervise national banks. As we will discuss in greater
detail later in this preamble, both of these changes serve to clarify
that Federal law commits the supervision of national banks' Federally-
authorized banking business exclusively to the OCC, (except where
Federal law provides otherwise), and does not apportion that
responsibility among the OCC and the states; and that state authorities
may not achieve indirectly by resort to judicial actions what section
484 prohibits them from achieving directly through state regulatory or
supervisory mechanisms. The proposal also added an exception in
proposed new Sec. 7.4000(b)(vi) recognizing that functional regulators
may exercise the authority over national banks conferred by the Gramm-
Leach-Bliley Act (GLBA).\2\
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\2\ Pub. L. 106-102, 113 Stat. 1338 (Nov. 12, 1999). For
example, section 301 of the GLBA (codified at 15 U.S.C. 6711)
provides that national banks' insurance activities are functionally
regulated by the states, subject to the applicability of state law
provisions in section 104 of that law (codified at 15 U.S.C. 6701).
Id. at section 301, 113 Stat. at 1407, codified at 15 U.S.C. 6711.
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C. Overview of Comments Received
Many commenters supported the proposal, noting that the
clarification of the visitorial powers regulations would be helpful.
One commenter said that subjecting national banks' Federally-authorized
activities to state regulation would be inconsistent with the purposes
of the National Bank Act. Others noted that additional layers of state
supervision would have the effect of making the operations of national
banks less efficient and more costly. Commenters also stated that they
supported the proposal's clarification of
[[Page 1896]]
the ``courts of justice'' exception. A number of commenters supporting
the proposal suggested that, while the reference in the preamble is
helpful, the OCC should add language to the regulation text to
explicitly state that the OCC's exclusive visitorial authority applies
to operating subsidiaries.
We also received a number of comments that opposed the proposal.
These commenters advanced four principal points: first, that the
visitorial powers amendments are inconsistent with the fundamental
tenets of the dual banking system, pursuant to which national banks are
subject to state regulation; second, that the amendments are
inconsistent with the presumptive applicability of state law to
national banks, as endorsed by the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the Riegle-Neal Act); \3\ third, that
the OCC's visitorial power over national banks is not exclusive; and,
finally, that the OCC lacks authority to prevent states from exercising
visitorial powers over national bank operating subsidiaries. The
following discussion addresses each of these points.
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\3\ Pub. L. 103-328, 108 Stat. 2338 (Sept. 29, 1994).
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D. Discussion
1. The Exclusivity of the OCC's Visitorial Authority is Integral to--
Not Inconsistent With--the Dual Banking System
Many commenters opposed to the proposal argued that the amendments
would amount to a ``field preemption'' that would be inconsistent with
what they aver to be a fundamental tenet of the dual banking system,
namely, that states have the authority to regulate the business
operations of all banks, including national banks, unless Congress
preempts state law in specific areas.
This argument mischaracterizes the essence of the dual banking
system. Differences in national and state bank powers and in the
supervision and regulation of national and state banks are not
inconsistent with the dual banking system; rather they are the defining
characteristics of it. As one noted commenter has observed, ``[t]he
very core of the dual banking system is the simultaneous existence of
different regulatory options that are not alike in terms of statutory
provisions, regulatory implementation and administrative policy.''\4\
The Federal grant of national bank powers and the uniformity of the
standards that govern their exercise, coupled with the OCC's exclusive
visitorial authority, are fundamental distinctions between the national
banking system and the system of state-chartered and regulated banks
that comprises the other half of the dual banking system.
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\4\ Kenneth E. Scott, The Dual Banking System: A Model of
Competition in Regulation, 30 Stan. L. Rev. 1, 41 (1977).
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Neither the case law nor scholarly literature recognizes a
definition of dual banking incorporating the notion that national banks
are subject to state supervision and regulation of activities they are
authorized to conduct under Federal banking law.\5\ What the case law
does recognize is that ``states retain some power to regulate national
banks in areas such as contracts, debt collection, acquisition and
transfer of property, and taxation, zoning, criminal, and tort law.''
\6\ Application of these laws to national banks and their
implementation by state authorities typically does not affect the
content or extent of the Federally-authorized business of banking
conducted by national banks, but rather establishes the legal
infrastructure that surrounds and supports the ability of national
banks--and others--to do business.\7\ In other words, these state laws
provide a framework for a national bank's ability to exercise powers
granted under Federal law; they do not obstruct or condition a national
bank's exercise of those powers.\8\
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\5\ The following is typical of the way the dual banking system
is described in recent scholarly articles:
``Depository financial institutions in the United States,
including banks, credit unions, and thrifts, are unique in that
their incorporators and/or management have a choice between state
and federal charters, regulatory authorities, and governing
statutes. No other industry has separate and distinct laws governing
its powers, regulation, and organizational structure. This
phenomenon is known as the `dual banking system'.''
John J. Schroeder, ``Duel'' Banking Sytem? State Bank Parity
Laws: An Examination of Regulatory Practice, Constitutional Issues,
and Philosophical Questions, 36 Ind. L. Rev. 197, at 197 (2003),
citing Arthur E. Wilmarth, Jr., The Dual Banking System--A Legal
History (Sept. 30, 1991) (unpublished paper presented at the
Education Foundation of State Bank Supervisors (EFSBS) Seminar for
State Banking Department Attorneys).
\6\ Bank of America v. City & County of San Francisco, 309 F.3d
551, 559 (9th Cir. 2002).
\7\ The OCC is publishing in the Federal Register today a final
rule amending parts 7 and 34 of the OCC's regulations to clarify
that these state ``infrastructure'' statutes would generally not be
preempted by Federal law.
\8\ See Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S.
25, 33-34 (1996).
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The argument that the proposed amendments generally amount to an
impermissible ``field preemption'' is also misplaced. First, the
regulatory proposal and the final regulation would not have the effect
of preempting substantive state laws, but rather would clarify the
appropriate agency for enforcing those state laws that are applicable
to national banks. Concerns about ``field preemption'' are misplaced
since the rule pertains only to state laws that would provide for state
``visitation'' of national banks. The proposal and this final rule
interpret the text of a Federal statute, 12 U.S.C. 484, that expressly
confines the scope of permissible supervision over national banks to
what is provided in Federal law, including the limited exception for
state inspection of certain records that is contained in section 484.
Thus, Congress has spoken to the issue. Our amendments to our
visitorial powers rule seek to define the terms used in the statute in
order to provide greater certainty to affected parties with regard to
the specific issue of visitation.
2. No Presumption Against Preemption Applies in the Case of the
National Banking Laws, a Conclusion That Is Confirmed by the Riegle-
Neal Act
Commenters also argued that the amendments in the proposal are
inconsistent with the presumptive application of state law to national
banks, which they assert was specifically endorsed by Congress in the
Riegle-Neal Act.\9\
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\9\ Commenters rely on the legislative history of the Riegle-
Neal Act as support for their assertions. This history demonstrates
that Congress intended that the Riegle-Neal Act would not disrupt
the application of traditional principles of Federal preemption to
questions involving national banks. We note, however, that under
well-established principles of statutory construction, it is not
necessary to resort to legislative history to determine the meaning
of a statute unless the text of the statute is ambiguous, which is
not the case here. See, e.g., Burlington Northern R.R. Co. v.
Oklahoma Tax Commission, 481 U.S. 454, 461 (1987) (unless there are
exceptional circumstances, judicial inquiry into the meaning of a
statute is complete once the court finds that the terms of the
statute are unambiguous.) (citation omitted); see also 2A Norman J.
Singer, Sutherland, Statutes and Statutory Construction Sec. 48.01,
at 410 (6th ed. 2000) (``Generally, a court would look to the
legislative history for guidance when the enacted text was capable
of two reasonable readings or when no one path of meaning was
clearly indicated.'').
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However, case law, whether decided before or after Riegle-Neal was
enacted, is consistent in holding that there is no presumption against
preemption in the national bank context. The Supreme Court has said
that a presumption against preemption ``is not triggered when the State
regulates in an area where there has been a history of significant
federal presence.'' \10\ Courts have consistently held that the
regulation of national banks is an area where there has been an
extensive history of significant Federal presence. As recently observed
by the U.S. Court
[[Page 1897]]
of Appeals for the Ninth Circuit, ``since the passage of the National
Bank Act in 1864, the federal presence in banking has been
significant.'' The court thus specifically concluded that ``the
presumption against preemption of state law is inapplicable.'' \11\
Indeed, when analyzing national bank powers, the Supreme Court has
interpreted ``grants of both enumerated and incidental `powers' to
national banks as grants of authority not normally limited by, but
rather ordinarily pre-empting, contrary state law.'' \12\
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\10\ U.S. v. Locke, 529 U.S. 89, 108 (2000) (explaining Rice v.
Santa Fe Elevator Corp., 331 U.S. 218 (1947)).
\11\ Bank of America, 309 F.3d at 558-59 (citations omitted).
\12\ Barnett, 517 U.S. at 32. The Barnett Court went on to
elaborate:
[W]here Congress has not expressly conditioned the grant of
`power' upon a grant of state permission, the Court has ordinarily
found that no such condition applies. In Franklin Nat. Bank, the
Court made this point explicit. It held that Congress did not intend
to subject national banks' power to local restrictions, because the
federal power-granting statute there in question contained `no
indication that Congress [so] intended * * * as it has done by
express language in several other instances.'
Id. at 34 (emphasis in original) (citations omitted).
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The relevant text of the Riegle-Neal Act is fully consistent with
these conclusions. In fact, it is entirely consistent with the proposal
and final rule in providing that even when state law may be applicable
to interstate branches of national banks, the OCC is to enforce such
laws, i.e., the OCC retains exclusive visitorial authority:
(A) In general
The laws of the host State regarding community reinvestment,
consumer protection, fair lending, and establishment of intrastate
branches shall apply to any branch in the host State of an out-of-State
national bank to the same extent as such State laws apply to a branch
of a bank chartered by that State, except--
(i) When Federal law preempts the application of such State laws to
a national bank; * * *
(B) Enforcement of applicable State laws
The provisions of any State law to which a branch of a national
bank is subject under this paragraph shall be enforced, with respect to
such branch, by the Comptroller of the Currency.\13\
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\13\ 12 U.S.C. 36(f)(1) (emphasis added).
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Thus, although Riegle-Neal section 36(f) clarifies that the laws of
the host state regarding community reinvestment, consumer protection,
and fair lending would be applicable to branches of an out-of-state
national bank located in the host state, unless preempted, the Riegle-
Neal Act further and unambiguously provides that it is the OCC that has
the authority to enforce such state laws to the extent they are not
preempted.
3. Section 484 Grants Visitorial Authority to the OCC, to the Exclusion
of the States
Some commenters argued that the OCC's visitorial power is not
exclusive because (1) the text of the statute does not contain an
explicit grant of exclusive authority to the OCC; and (2) courts have
permitted states to exercise concurrent authority to seek enforcement
of state laws. These two contentions are addressed in turn.
a. The Text of Section 484
Commenters who opposed the proposal argued that the OCC may not
rely on 12 U.S.C. 484 as the basis for our exclusive jurisdiction
because that section is silent on precisely who has visitorial powers
over national banks. A review of the history of section 484 shows that
this reading of the statute is fundamentally mistaken.
In the Act of June 3, 1864, later named the National Bank Act, the
visitorial powers provision appeared in the same section as the
Comptroller's examination authority. In that context, it was clear that
visitorial authority was exclusive to the Comptroller, subject to a
single exception for powers ``vested in the several courts of law and
chancery.'' Section 54 of the National Bank Act provided in relevant
part:
And be it further enacted, That the comptroller of the currency,
with the approbation of the Secretary of the Treasury, as often as
shall be deemed necessary or proper, shall appoint a suitable person or
persons to make an examination of the affairs of every banking
association. * * * And the association shall not be subject to any
other visitorial powers than such as are authorized by this act, except
such as are vested in the several courts of law and chancery.\14\
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\14\ Act of June 3, 1864, c. 106, Sec. 54, 13 Stat. 116,
codified at 12 U.S.C. 481-484.
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These examination and visitorial provisions of section 54 were
codified together in 1875 at section 5240 of the Revised Statutes of
the United States. Section 5240 explicitly gave the OCC visitorial
authority over national banks and precluded the exercise of visitorial
authority by any other source, except insofar as expressly allowed by
one of the exceptions, including the exception covering visitations
``as authorized by Federal law.'' In context, the meaning of the text
is unmistakable. The Comptroller is given the power to examine and
supervise national banks--that is, to serve as the ``visitor'' of the
bank--and that power, as well as any other ``visitorial'' power is
denied to any other entity unless Federal law provides otherwise.
The examination and visitorial provisions were split, slightly
revised, then later reunited, in subsequent codifications,\15\ but
Congress has never altered the original meaning of these grants of
authority to the OCC. The visitorial provision has been substantively
amended only twice, once in 1913 and once in 1982.\16\ Both times, the
amendments were consistent with the exclusive grant of visitorial
authority in the original enactment. In both cases, the legislative
history, though sparse, contains no indication that Congress intended
to change the exclusivity of its original grant of authority to the
Comptroller. In fact, the 1982 amendment that added the exception
allowing state authorities to review national bank records to ascertain
compliance with state escheat or unclaimed property laws would have
been unnecessary if the language of section 484 permitted state
examination and enforcement of applicable state law. As codified today,
the examination and visitorial provisions appear in separate sections
of the United States Code. Substantive consequences do not attach to
the placement of the provisions in the Code, however, and neither
provision may be read in isolation to suggest a meaning that is
inconsistent with the law as enacted by the Congress.
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\15\ The examination provision is currently codified at 12
U.S.C. 481.
\16\ In 1913, the exception for Congress and its committees was
added, the reference to the Act of June 3, 1864 changed to ``other
than such as are authorized by law,'' and the word ``bank''
substituted for the word ``association.'' Amendments in 1982 added
the exception allowing state authorities to review national bank
records to ascertain compliance with state escheat or unclaimed
property laws, added the word ``Federal'' before the word ``law,''
and changed ``bank'' to ``national bank.''
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Moreover, exclusivity is inherent in the structure of the statute,
both as originally enacted and today. The visitorial powers provision
first sets forth a complete prohibition, then subjects that prohibition
to certain exceptions.\17\ The inference to be drawn from this
structure is that the prohibition applies unless a visitorial power is
covered by one of the
[[Page 1898]]
enumerated exceptions. As noted above, the statute's description of the
exceptions has changed--though the changes have been modest--over time.
But none of these exceptions allows for the allocation of any general
bank supervisory responsibility to the states.
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\17\ Commenters cited to First Union Nat'l Bank v. Burke, 48 F.
Supp. 2d 132 (D. Conn. 1999), in support of their contention that
the OCC's visitorial power is not exclusive. We disagree that the
court's opinion is dispositive of the issues considered here. The
opinion did not analyze the purpose, plain language, and structure
of section 484. Moreover, we note that the Burke court agreed that a
state may not directly enforce state law against national banks.
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As we discussed when we issued the visitorial powers proposal, any
allocation of general supervisory authority over national banks to the
states would be inconsistent with the history and purpose of the
National Bank Act, as well as with the express language of the statute.
Congress enacted the National Currency Act (Currency Act) in 1863 and
the National Bank Act the year after for the purpose of establishing a
new national banking system that would operate distinctly and
separately from the existing system of state banks. The Currency Act
and National Bank Act were enacted to create a uniform and secure
national currency and a system of national banks designed to help
stabilize and support the post-Civil War national economy.
Both proponents and opponents of the new national banking system
expected that it would supersede the existing system of state
banks.\18\ Given this anticipated impact on state banks and the
resulting diminution of control by the states over banking in
general,\19\ proponents of the national banking system were concerned
that states \20\ would attempt to undermine it. Remarks of Senator
Sumner illustrate the sentiment of many legislators of the time:
``Clearly, the bank must not be subjected to any local government,
State or municipal; it must be kept absolutely and exclusively under
that Government from which it derives its functions.'' \21\
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\18\ Representative Samuel Hooper, who reported the bill to the
House, stated in support of the legislation that one of its purposes
was ``to render the law [i.e., the Currency Act] so perfect that the
State banks may be induced to organize under it, in preference to
continuing under their State charters.'' Cong. Globe, 38th Cong. 1st
Sess. 1256 (Mar. 23, 1864). While he did not believe that the
legislation was necessarily harmful to the state bank system, Rep.
Hooper did ``look upon the system of State banks as having outlived
its usefulness.'' Id. Opponents of the legislation believed that it
was intended to ``take from the States * * * all authority
whatsoever over their own State banks, and to vest that authority *
* * in Washington.'' Cong. Globe, 38th Cong., 1st Sess. 1267 (Mar.
24, 1864) (statement of Rep. Brooks). Rep. Brooks made that
statement to support the idea that the legislation was intended to
transfer control over banking from the states to the Federal
government. Given that the legislation's objective was to replace
state banks with national banks, its passage would, in Rep. Brooks's
opinion, mean that there would be no state banks left over which the
states would have authority. Thus, by observing that the legislation
was intended to take authority over state banks from the states,
Rep. Brooks was not suggesting that the Federal government would
have authority over state banks; rather, he was explaining the bill
in a context that assumed the demise of state banks. Rep. Pruyn
opposed the bill stating that the legislation would ``be the
greatest blow yet inflicted upon the States.'' Cong. Globe, 38th
Cong., 1st Sess. 1271 (Mar. 24, 1864). See also John Wilson Million,
The Debate on the National Bank Act of 1863, 2 J. Pol. Econ. 251,
267 (1893-94) regarding the Currency Act. (``Nothing can be more
obvious from the debates than that the national system was to
supersede the system of state banks.'').
\19\ See, e.g., Tiffany v. Nat'l Bank of Missouri, 85 U.S. 409,
412-413 (1874) (``It cannot be doubted, in view of the purpose of
Congress in providing for the organization of National banking
associations, that it was intended to give them a firm footing in
the different States where they might be located. It was expected
they would come into competition with State banks, and it was
intended to give them at least equal advantages in such competition.
* * * National banks have been National favorites. They were
established for the purpose, in part, of providing a currency for
the whole country, and in part to create a market for the loans of
the General government. It could not have been intended, therefore,
to expose them to the hazard of unfriendly legislation by the
States, or to ruinous competition with State banks.''); Beneficial
Nat'l Bank v. Anderson, 123 S. Ct. 2058, 2064 (2003) (``[T]his Court
has also recognized the special nature of federally chartered banks.
Uniform rules limiting the liability of national banks and
prescribing exclusive remedies for their overcharges are an integral
part of a banking system that needed protection from `possible
unfriendly State legislation.''') (citation omitted). See also Bray
Hammond, Banks and Politics in America from the Revolution to the
Civil War 725-34 (1957); Paul Studenski & Herman E. Krooss,
Financial History of the United States 154-55 (1952).
\20\ For ease of reference, we use the term ``state'' in this
preamble in a way that includes other non-Federal governmental
entities.
\21\ Cong. Globe, 38th Cong., 1st Sess., at 1893 (Apr. 27,
1864); see also Beneficial Nat'l Bank, 123 S.Ct. at 2064.
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The allocation of any supervisory responsibility for the new
national banking system to the states would have been inconsistent with
this need to protect national banks from state interference.\22\
Congress, accordingly, established a Federal supervisory regime and
created a Federal agency within the Department of Treasury--the OCC--to
carry it out. Congress granted the OCC the broad authority ``to make a
thorough examination into all the affairs of [a national bank],'' \23\
and solidified this Federal supervisory authority by vesting the OCC
with exclusive visitorial powers over national banks. These provisions
assured, among other things, that the OCC would have comprehensive
authority to examine all the affairs of a national bank, and protected
national banks from potential state hostility by establishing that the
authority to examine and supervise national banks is vested only in the
OCC, unless otherwise provided by Federal law.\24\
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\22\ In a report of the Comptroller of the Currency made
pursuant to the Currency Act, Hugh McCulloch, then Comptroller,
discussed the need to protect national banks from variation in
interest rates among the states by making a change in the law to
provide for uniform interest rates. He referred to the Supreme Court
decision in M'Culloch v. Maryland, 17 U.S. 316 (1819), which
prohibited the state of Maryland from imposing taxes on the Bank of
the United States under the Federal statute establishing the bank,
as support for Congress having the authority to make this change by
likening the Maryland taxation statute to a state statute on
interest. Office of the Comptroller of the Currency, Report on the
Finances, Nov. 28, 1863, at 52-53.
\23\ Act of June 3, 1864, c. 106, Sec. 54, 13 Stat. 116,
codified at 12 U.S.C. 481.
\24\ Writing shortly after the Currency Act and National Bank
Act were enacted, then-Secretary of the Treasury, and formerly the
first Comptroller of the Currency, Hugh McCulloch observed that
``Congress has assumed entire control of the currency of the
country, and, to a very considerable extent, of its banking
interests, prohibiting the interference of State governments.''
Letter of Secretary of the Treasury, serial set collection, CIS No.
1239 S.misdoc.100, 39th Cong., 1st Sess., Misc. Doc. No. 100, at 2
(Apr. 23, 1866).
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Courts have consistently recognized the unique status of the
national banking system and the limits placed on states by the National
Bank Act. The Supreme Court stated in one of the first cases to address
the role of the national banking system that ``[t]he national banks
organized under the [National Bank Act] are instruments designed to be
used to aid the government in the administration of an important branch
of the public service. They are means appropriate to that end.'' \25\
Subsequent opinions of the Supreme Court have been equally clear about
national banks' unique role and status.\26\
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\25\ Farmers' & Mechanics' Nat'l Bank v. Dearing, 91 U.S. 29, 33
(1875).
\26\ See Marquette Nat'l Bank of Minneapolis v. First Omaha
Service Corp., 439 U.S. 299, 314-315 (1978) (``Close examination of
the National Bank Act of 1864, its legislative history, and its
historical context makes clear that, . . . Congress intended to
facilitate . . . a `national banking system'.'' (citation omitted));
Franklin Nat'l Bank of Franklin Square v. New York, 347 U.S. 373,
375 (1954) (``The United States has set up a system of national
banks as federal instrumentalities to perform various functions such
as providing circulating medium and government credit, as well as
financing commerce and acting as private depositories.''); Davis v.
Elmira Sav. Bank, 161 U.S. 275, 283 (1896) (``National banks are
instrumentalities of the Federal government, created for a public
purpose, and as such necessarily subject to the paramount authority
of the United States.'').
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In Guthrie v. Harkness,\27\ the Supreme Court recognized how the
National Bank Act furthered the objectives of Congress:
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\27\ 199 U.S. 148, 159 (1905).
Congress had in mind in passing this section [section 484] that
in other sections of the law it had made full and complete provision
for investigation by the Comptroller of the Currency and examiners
appointed by him, and, authorizing the appointment of a receiver, to
take possession of the business with a view to winding up the
affairs of the bank. It was the intention that this statute should
contain a full code of provisions upon the subject, and that no
state law or enactment should undertake to exercise the right of
visitation over a national corporation. Except in so far as such
corporation was liable to control in the courts
[[Page 1899]]
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of justice, this act was to be the full measure of visitorial power.
The Supreme Court also has recognized the clear intent on the part
of Congress to limit the authority of states over national banks
precisely so that the nationwide system of banking that was created in
the Currency Act could develop and flourish. For instance, in Easton v.
Iowa,\28\ the Court stated that Federal legislation affecting national
banks'--
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\28\ 188 U.S. 220, 229, 231-32 (1903) (emphasis added).
has in view the erection of a system extending throughout the
country, and independent, so far as powers conferred are concerned,
of state legislation which, if permitted to be applicable, might
impose limitations and restrictions as various and as numerous as
the states. * * * It thus appears that Congress has provided a
symmetrical and complete scheme for the banks to be organized under
the provisions of the statute. * * * [W]e are unable to perceive
that Congress intended to leave the field open for the states to
attempt to promote the welfare and stability of national banks by
direct legislation. If they had such power it would have to be
exercised and limited by their own discretion, and confusion would
necessarily result from control possessed and exercised by two
---------------------------------------------------------------------------
independent authorities.
And in Farmers' & Mechanics' National Bank, after observing that
national banks are means to aid the government, the Court stated--
Being such means, brought into existence for this purpose, and
intended to be so employed, the States can exercise no control over
them, nor in any wise affect their operation, except in so far as
Congress may see proper to permit. Any thing beyond this is ``an
abuse, because it is the usurpation of power which a single State
cannot give.'' \29\
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\29\ 91 U.S. at 34 (citations omitted).
Our proposed amendment clarifying the scope of the visitorial
powers authorized to the OCC pursuant to section 484 is consistent with
the historical meaning of the term ``visitation'' and with cases
discussing section 484. The Supreme Court in Guthrie noted that the
term ``visitorial'' as used in section 484 derives from English common
law, which used the term ``visitation'' to refer to the act of a
superintending officer who visits a corporation to examine its manner
of conducting business and enforce observance of the laws and
regulations.\30\ `` `Visitors of corporations have power to keep them
within the legitimate sphere of their operations, and to correct all
abuses of authority, and to nullify all irregular proceedings.' ''\31\
The Guthrie Court also noted that visitorial powers include bringing
``judicial proceedings'' against a corporation to enforce compliance
with applicable law.\32\
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\30\ Guthrie, 199 U.S. at 158, citing First Nat'l Bank of
Youngstown v. Hughes, 6 F. 737, 740 (C.C.D. Ohio 1881), appeal
dismissed, 106 U.S. 523 (1883)). Because ``visitation'' assumes the
act of a sovereign body, private actions brought by individuals
against banks in pursuit of personal claims ordinarily are outside
the scope of visitorial powers rules. This point is discussed
further in the analysis of the arguments asserting concurrent
jurisdiction between state and Federal courts over national banks,
infra.
\31\ Id. (citation omitted).
\32\ Id. See also Peoples Bank of Danville v. Williams, 449 F.
Supp. 254, 259 (W. D. Va. 1978) (visitorial powers involve the
exercise of the right of inspection, superintendence, direction, or
regulation over a bank's affairs). For a detailed discussion of the
historical scope and content of visitorial powers generally, see
Roscoe Pound, Visitatorial Jurisdiction Over Corporations in Equity,
49 Harv. L. Rev. 369 (1935-36).
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b. Concurrent Enforcement Jurisdiction
Several commenters asserted that states retain jurisdiction
concurrent with the OCC to enforce compliance with state laws against
national banks in both state and Federal court.\33\ The cases cited by
commenters in support of this contention are examples of the use of
courts for private civil cases in pursuit of personal claims against
national banks, which, unlike attempts by state authorities to exercise
authority over national banks using the courts, do not amount to
visitations.\34\ Other cases cited by commenters appear inapposite or
outdated.\35\
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\33\ We note that the National Bank Act did confer jurisdiction
on both state and Federal courts over actions against national
banks. See Act of June 3, 1864, Sec. 57. Nothing in the grant of
jurisdiction says or implies that state authorities may use the
judiciary as the medium to supervise, examine, or regulate the
business of national banks, as commenters have asserted.
\34\ First Nat'l Bank of Charlotte v. Morgan, 132 U.S. 141
(1889) (private action for usury against national banks may be
brought in state court); Bank of Bethel v. Pahquioque Bank, 81 U.S.
383 (1872) (private creditors may sue national bank in state court).
\35\ See, e.g., Guthrie, 199 U.S. 148 (private civil action by a
stockholder to compel, by writ of mandamus, the directors of a
national bank to permit a stockholder to inspect the bank's books;
private civil action, no state executive visitation involved);
Colorado Nat'l Bank of Denver v. Bedford, 310 U.S. 41 (1940) (action
for declaratory judgment; consistent with the OCC's final
regulation, which does not regard actions for declaratory judgment
as visitorial); Waite v. Dowley, 94 U.S. 527 (1877) (substantive
preemption case that did not involve visitorial powers); and First
Nat'l Bank of Youngstown, 6 F. at 741 (no visitation involved where
state taxation authorities used court to compel production of bank's
records in aid of taxation of individual depositors; state actions
did ``not contemplate inspection, supervision, or regulation of [the
bank's] business, or an enforcement of its laws or regulations.'').
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A few commenters cited First National Bank in St. Louis v. Missouri
\36\ to support their position that states may bring enforcement
actions directly against national banks.\37\ In St. Louis, the court
upheld a state's ability to preclude, through an action quo warranto, a
national bank's exercise of a power that was not then authorized to it,
namely, intrastate branching.
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\36\ 263 U.S. 640 (1924).
\37\ In St. Louis, the state of Missouri brought a quo warranto
action to stop a national bank from operating a branch in the state.
The state had a law prohibiting branch banking. The Supreme Court
held that the state statute was applicable to national banks and
could be enforced by the state. Quo warranto is ``[a] common law
writ designed to test whether a person exercising power is legally
entitled to do so. An extraordinary proceeding, prerogative in
nature, addressed to preventing a continued exercise of authority
unlawfully asserted. * * * It is intended to prevent exercise of
powers that are not conferred by law, and is not ordinarily
available to regulate the manner of exercising such powers.''
Black's Law Dictionary (6th ed. 1990) (citation omitted). Today,
such an issue would be raised via an action for a declaratory
judgment.
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St. Louis presents a unique set of circumstances, now outdated, and
did not discuss the scope of section 484; thus the case provides little
help in construing section 484. The principal issue in the case was
whether a national bank had the power to branch intrastate despite a
state law prohibition on branching. The Court looked for express
authority to branch intrastate in the text of the National Bank Act
and, finding none, concluded that the activity was not authorized. The
Court then went on to permit Missouri to enforce its intrastate
branching prohibition against the national bank. To the extent that St.
Louis is still relevant, the case holds that a state may enforce a
prohibition against a national bank where: (a) the national bank is
found to lack the fundamental authority to engage in an activity;\38\
(b) the state has a law prohibiting the activity entirely; and (c) no
Federal enforcement mechanism is available to preclude the bank from
violating the applicable state law.
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\38\ The power to branch intrastate was subsequently authorized
for national banks by the McFadden Act in 1927. Act of February 25,
1927, c. 191, Sec. 7, 44 Stat. 1228, codified at 12 U.S.C. 36.
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The principal means in use today for testing the application of
state law to national banks--declaratory judgment--was unavailable to
the states prior to the enactment of the Declaratory Judgment Act in
1934, 28 U.S.C. 2201 through 2202. If this type of action had been
available at the time of the St. Louis case, there would have been no
need for the state to bring a quo warranto action. Subsequent cases
concerning the power of national banks to branch have typically been
brought as declaratory judgments.\39\
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\39\ See, e.g., Jackson v. First Nat'l Bank of Valdosta, 349
F.2d 71 (5th Cir. 1965); State of Utah, ex rel., Dep't of Financial
Institutions v. Zions First Nat'l Bank of Ogden, Utah, 615 F.2d 903
(10th Cir. 1980).
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[[Page 1900]]
Moreover, the OCC has enforcement authority today that did not
exist when St. Louis was decided. Congress authorized the OCC to bring
enforcement actions predicated on, inter alia, violations of state law
in 1966.\40\ Thus, if state law that would regulate an aspect of a
national bank's Federally-authorized banking business is not preempted,
it would be enforced by the OCC, not the states.\41\
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\40\ Pub. L. 89-695, section 202, 80 Stat. 1028 (Oct. 16, 1966).
For a violation of an applicable state law, the OCC may issue cease
and desist orders, exercise its removal and prohibition authority,
or impose civil money penalties. See 12 U.S.C. 1818(b), (e), and
(i)(2).
\41\ See Nat'l State Bank, Elizabeth, N.J. v. Long, 630 F.2d
981, 988 (3rd Cir. 1980). See also State of Arizona v. Hispanic Air
Conditioning and Heating, Inc., CV 2000-003625, Superior Court of
Arizona, Ruling at 27-28, Conclusions of Law, paragraphs 46-55 (Aug.
25, 2003). In this action involving a national bank defendant, the
court found that restitution and remedial action ordered by OCC
pursuant to its visitorial powers was comprehensive and
significantly broader than that available through state court
proceedings and that it provided more relief to consumers than the
court found a legal basis for imposing under state law. The court
also noted that ordering the remedies requested by the state would
impermissibly affect the exercise of the OCC's administrative
enforcement powers.
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The essential elements of St. Louis thus are entirely consistent
with our construction of the ``courts of justice'' exception as
proposed. Moreover, our construction is consistent with the text and
history of section 484, the purpose of that section in the context of
the national banking laws, and with other U.S. Supreme Court and lower
Federal court precedents. The exception preserves the powers that are
inherent in the courts. As we noted in the preamble to the proposal,
Congress clearly did not intend to create new visitorial authority that
could be exercised by state authorities when it recognized the
authority of courts of justice. It would be completely contrary to the
express purposes of section 484 to read the ``vested in the courts of
justice'' exception as a new Federal authorization for state
authorities to accomplish exactly what Congress deliberately and
expressly intended states not to be able to do--namely, inspect and
supervise the activities of national banks and compel their adherence
to a variety of state-set standards.
This purpose is effectuated by the plain language of the statute.
The exception permits the exercise of ``visitorial powers'' that are
``vested in the courts of justice,'' powers, in other words, that
courts possess. Section 484 does not create new powers for state
executive, legislative, or administrative authorities to supervise and
regulate national banks. It grants no new authority and thus does not
authorize states to bring suits or enforcement actions that they do not
otherwise have the power to bring.
To read the exception as an authorization to permit state
authorities to inspect, regulate, supervise, direct, or restrict the
activities of national banks simply by filing a complaint in a court
would be to create a visitorial power that states do not otherwise
possess under Federal law. Section 484 by its express terms simply does
not create such boundless visitorial powers for state authorities.
Where section 484 does recognize visitorial authority for states in
section 484(b), by contrast, it is specific and narrow, and expressly
stated as an exception to the general exclusivity of the OCC's
visitorial powers recognized in section 484(a).
Under this construction of section 484, states remain free to seek
a declaratory judgment from a court as to whether a particular state
law applies to the Federally-authorized business of a national bank or
is preempted. However, if a court rules that a state law is not
preempted, enforcement of a national bank's compliance with a law that
would govern the content or the conditions for conduct of a national
bank's Federally-authorized banking business is within the OCC's
exclusive purview.\42\ In addition, it does not preclude actions
brought by other governmental entities pursuant to a Federal grant of
authority.\43\
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\42\ See Nat'l State Bank, Elizabeth, N.J., 630 F.2d at 988
(``[W]e find ourselves unable to agree with the district court's
determination that state officials have the power to issue cease and
desist orders against national banks for violations of the [state's]
antiredlining statute. Congress has delegated enforcement of
statutes and regulations against national banks to the Comptroller
of the Currency.''); see also First Union Nat'l Bank, 48 F. Supp. 2d
at 145-46.
\43\ See, e.g., Bank of America Nat'l Trust & Savings Ass'n v.
Douglas, 105 F.2d 100 (D.C. Cir. 1939) (service of subpoenas on a
national bank by the SEC in connection with an investigation under
the Securities Exchange Act of 1934).
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4. The OCC Has Exclusive Visitorial Authority Over National Bank
Operating Subsidiaries to the Same Extent as It Has That Authority Over
the Parent National Bank
Commenters also asserted that the OCC lacks the authority to
prevent states from exercising visitorial authority over national bank
operating subsidiaries because they are state-chartered corporations
and because section 484 does not specifically refer to operating
subsidiaries. Some suggested that a curtailing of state authority over
state corporations violates the 10th Amendment to the Constitution.\44\
These points are discussed in order, however, it is important to note
that the issue of the application of state law to national bank
operating subsidiaries is dealt with in a different, preexisting
regulation, 12 CFR 7.4006, which we did not propose to change. For the
reasons discussed below, we continue to hold the view that under 12
U.S.C. 24(Seventh) and 12 CFR 7.4006, the standards of section 484
apply to national bank operating subsidiaries to the same extent as
their parent national bank, and such a result is entirely consistent
with Constitutional principles.
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\44\ The Tenth Amendment reads as follows: ``The powers not
delegated to the United States by the Constitution, nor prohibited
by it to the States, are reserved to the States respectively, or to
the people.'' U.S. Const. amend. X.
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a. The OCC's Exclusive Visitorial Authority Over Operating Subsidiaries
Pursuant to their authority under 12 U.S.C. 24(Seventh), national
banks have long used separately incorporated entities as a means to
engage in activities that the bank itself is authorized to conduct.
When established in accordance with OCC regulations and approved by the
OCC, an operating subsidiary is a Federally-authorized and Federally-
licensed means by which a national bank may conduct Federally-
authorized activities. Courts have consistently treated operating
subsidiaries as equivalent to national banks in determining their
powers and status under Federal law, unless Federal law requires
otherwise.\45\ Operating subsidiaries are consolidated with--that is,
their assets and liabilities are indistinguishable from--the parent
bank for accounting purposes, regulatory reporting purposes, and for
purposes of applying many Federal statutory or regulatory limits.\46\
They are, in essence, no more than incorporated departments of the bank
itself.\47\
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\45\ NationsBank of North Carolina, N.A. v. Variable Annuity
Life Ins. Co., 513 U.S. 251 (1995) (sale of annuities by operating
subsidiary); Clarke v. Securities Industry Ass'n, 479 U.S. 388
(1987) (securities brokerage operating subsidiary); American Ins.
Ass' v. Clarke, 865 F. 2d 278 (D.C. Cir. 1988) (bond insurance
subsidiary); M & M Leasing Corp. v. Seattle First Nat'l Bank, 563 F.
2d 1377 (9th Cir. 1977) (auto leasing subsidiary); and Valley Nat'l
Bank v. Lavecchia, 59 F. Supp. 2d 432 (D. N.J. 1999) (title
insurance subsidiary); Budnik v. Bank of America Mortgage, 2003 U.S.
Dist. LEXIS 22542 (N.D. IL 2003) (mortgage subsidiary).
\46\ See 12 CFR 5.34(e)(4) (requring application of, e.g.,
statutory lending limit and limit on investment in bank premises to
a national bank and its operating subsidiaries on a consolidated
basis).
\47\ The authority of national banks to conduct business through
operating subsidiaries has been recognized for many years. For
example, rulings published in the Comptroller's Manual in the mid-
1960s permitted national banks to own, e.g., mortgage companies and
finance companies. A July 30, 1965 letter by Comptroller James J.
Saxon concluded that the prohibition on stock ownership by national
banks in 12 U.S.C. Sec. 24 (Seventh) does not apply ``when such
ownership is a proper incident to banking,'' as is the case with
operating subsidiaries. See also 12 CFR 250.14, an interpretation by
the Board of Governors of the Federal Reserve System adopted in
1968, which reaches the same conclusion regarding state member
banks.
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[[Page 1901]]
As a matter of Federal law, operating subsidiaries conduct their
activities subject to the same terms and conditions as apply to the
parent bank, including being subject to the exclusive visitorial
authority of the OCC.\48\ Where Congress wanted a different result, it
specifically provided for it. For example, section 111 of GLBA makes
provision for state regulation of functionally regulated bank
subsidiaries conducting securities and insurance activities, treating
such subsidiaries as if they were instead subsidiaries of the
institution's holding company.\49\ Similarly, section 133 of GLBA seeks
to clarify the status of bank and thrift subsidiaries and affiliates
for purposes of any provisions of the Federal Trade Commission Act
applied by the Federal Trade Commission.\50\
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\48\ 12 CFR 5.34(e)(3); 12 CFR 7.4006.
\49\ 12 U.S.C. 1844(c)(4).
\50\ 15 U.S.C. 41 note. See Minnesota v. Fleet Mortgage Corp.,
181 F. Supp. 2d 995 (D. Minn. 2001). In addition, in the case of
national bank ``financial subsidiaries,'' which engage in activities
beyond those permissable for the bank itself, Congress provided
special standards regarding the application of state laws. Pub. L.
106-102, section 104, 113 Stat. 1338, 1352 (1999), codified at 15
U.S.C. 6701.
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Our regulations make clear that activities conducted in operating
subsidiaries must be permissible for a national bank to engage in
directly either as part of, or incidental to, the business of
banking.\51\ Moreover, the operating subsidiary is acting ``pursuant to
the same authorization, terms and conditions that apply to the conduct
of such activities by its parent national bank.''\52\ This includes
state laws that purport to govern the activities conducted in the
operating subsidiary. OCC regulations specifically provide that
``[u]nless otherwise provided by Federal law or OCC regulation, State
laws apply to national bank operating subsidiaries to the same extent
that those laws apply to the parent national bank.''\53\ Our
regulations reflect express Congressional recognition in section 121 of
the GLBA that national banks may own subsidiaries that engage ``solely
in activities that national banks are permitted to engage in directly
and are conducted subject to the same terms and conditions that govern
the conduct of such activities by national banks.''\54\ The ``terms and
conditions'' that govern the conduct of operating subsidiary activities
referenced in this provision include how, and by whom, the operating
subsidiary is examined and supervised. Thus, operating subsidiaries are
licensed, examined and supervised by the same Federal banking agency--
the OCC--that examines and supervises national banks, using the same
methodology as in the case of national banks.
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\51\ See 12 CFR 5.34(e)(1).
\52\ 12 CFR 5.34(e)(3).
\53\ 12 CFR 7.4006.
\54\ Pub. L. 106-102, section 121, 113 Stat. 1338, 1373 (1999),
codified at 12 U.S.C. 24a(g)(3)(A).
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Courts that have recently considered the issue have confirmed this
conclusion. In Wells Fargo Bank, N.A. v. Boutris,\55\ a Federal
district court issued a permanent injunction enjoining the California
Department of Corporations from exercising visitorial powers over a
national bank operating subsidiary. The court noted the existing case
law and concluded that the OCC's operating subsidiary regulation is
within the agency's authority delegated to it by Congress and is a
reasonable interpretation.\56\
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\55\ 265 F. Supp. 2d 1162 (E.D. Cal. 2003).
\56\ See also National City Bank of Indiana v. Boutris, 2003 WL
215367818 (E.D. Cal. July 2, 2003) (also enjoining California
officials from exercising visitorial powers over a national bank
operating subsidiar); Budnik supra note 45, at 5-7 citing the Wells
Fargo case with approval.
Moreover, the Office of Thrift Supervision (OTS) takes the same
approach with respect to operating subsidiaries of Federal thrifts
that we take for national banks. 12 CFR 559.3(n) of the OTS
regulations provides that state law applies to Federal savings
associations' operating subsidiaries to the extent that the law
applies to the parent thrift. This OTS regulation has been upheld by
both Federal and state courts. See WFS Financial Inc. v. Dean, 79 F.
Supp. 2d 1024 (W.D. Wis. 1999); see also Chaires v. Chevy Chase
Bank, F.S.B., 748 A.2d 34, 44 (Md. App. 2000).
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Section 7.4006 of our rules already provides that State law applies
to national bank operating subsidiaries to the same extent as it
applies to the parent bank.\57\ Thus, state laws purportedly forming
the basis for the exercise of state regulatory or supervisory authority
over national bank operating subsidiaries, which are inapplicable to
the parent national bank, are similarly inapplicable to the bank's
operating subsidiary. This conclusion is reinforced by the holdings of
the court in the Wells Fargo and National City cases, just described.
b. The Tenth Amendment
Recent case law also confirms that the final rule does not conflict
with the 10th Amendment. In the Wells Fargo case, supra, the California
commissioner argued that the OCC was interfering with the state's
sovereignty under the 10th Amendment by taking away its power to
regulate and enforce laws against state-chartered corporations. The
court held that once the OCC authorized the operating subsidiary of the
national bank, it ceased being subject to the visitorial power of the
state commissioner and that this change was not shown to infringe on
California's rights under the 10th Amendment. The court noted that
``the Constitution authorizes Congress to establish national banks''
and that ``[t]he National Bank Act's effect of `carving out from state
control supervisory authority' over an OCC-authorized operating
subsidiary of a national bank does not violate California's Tenth
Amendment rights.''\58\
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\57\ 12 CFR 7.4006.
\58\ Wells Fargo, 265 F. Supp. 2d at 1170, (citing M'Culloch, 17
U.S. at 424-25 and First Union Nat'] Bank, 48 F. Supp. 2d at 148
(emphasis added). See also Nat'l City Bank of Indiana, 2003 WL
21536818 at 3 and 4.
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A few commenters cite Hopkins Federal Savings & Loan Association v.
Cleary,\59\ as support for the assertion that the 10th Amendment
prohibits the Federal government from interfering with a state's
jurisdiction over corporations created under that state's laws. In that
case, the court held that a Federal statute (HOLA), which permitted the
conversion of state savings associations into Federal savings
associations notwithstanding state law to the contrary, was
unconstitutional because it conflicted with the 10th Amendment.
---------------------------------------------------------------------------
\59\ 296 U.S. 315(1935).
---------------------------------------------------------------------------
The essence of the Hopkins case was that Congress had attempted to
confer rights on a state-chartered entity that were greater than those
conferred by the state, namely a more liberal voting requirement for a
conversion. As stated by the Hopkins Court, ``[t]he critical question
[was] whether along with such a power [of the U.S. Congress to create
Federal building and loan associations] there goes the power also to
put an end to corporations created by the states and turn them into
different corporations created by the nation.''\60\ The Court's
characterization of the issue highlights the distinction between the
state-chartered building and loan associations in the Hopkins case and
national bank operating subsidiaries. The Court found the law--
unconstitutionally--attempted to displace a preexisting state interest
by permitting the abandonment of a state bank charter notwithstanding
contrary state law. After discussing why the state should retain the
right to determine
[[Page 1902]]
when and how a state thrift is dissolved, the court noted that it would
be ``an intrusion for another government to regulate by statute or
decision, except when reasonably necessary for the fair and effective
exercise of some other and cognate power explicitly conferred.'' \61\
Hopkins is thus factually inapposite for two reasons. First,
nothing in this final rule addresses changes in charter type or
corporate status by state-chartered entities. Second, as we have
explained, once it is established or acquired, a national bank
operating subsidiary is a means by which the national bank exercises
Federally authorized powers. The operating subsidiary conducts its
activities pursuant to a license granted under OCC regulations, which
also constitutes a Federal ``license'' under the Administrative
Procedure Act.\62\ In contrast to the state-chartered thrift
institutions in Hopkins, its operation and activities are thus properly
within the purview of Federal regulation.\63\
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\60\ Id. at 336.
\61\ Id. at 337 (emphasis added).
\62\ Under the Administrative Procedure Act, Federal agencies
may grant licenses after following certain procedures. 5 U.S.C.
558(c). National banks must comply with licensing requirements
contained in 12 CFR 5.34(b) in order to establish or acquire an
operating subsidiary. These requirements are consistent with the
Administrative Procedure Act.
\63\ Where a state entity is not within the purview of Federal
regulations, the OCC's rules require consideration of state law
before any approval or changes in corporate form. For example, where
a state-chartered nonbank affiliate of a national bank wishes to
merge with a national bank (with the resulting entity being a
national bank), the law of the state in which the nonbank affiliate
is organized must permit the state entity to engage in the merger.
See 12 CFR 5.33(g)(4)(i) as set forth in a final rule published on
December 17, 2003, 68 FR 70122.
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Later, the Court stated ``[w]e are not concerned at this time with
the applicable rule in situations where the central government is at
liberty (as it is under the commerce clause when such a purpose is
disclosed) to exercise a power that is exclusive as well as paramount *
* * No question is here as to the scope * * * of the power to regulate
transactions affecting interstate or foreign commerce.''\64\ Thus,
Hopkins explicitly does not address the limits of state and Federal
government authority, respectively, when a state corporation is engaged
in activities that are carried out under Federal law subject to Federal
authority.
---------------------------------------------------------------------------
\64\ Hopkins, 296 U.S. at 338, 343 (emphasis added) (citations
omitted).
---------------------------------------------------------------------------
Case law since Hopkins has clarified the interplay between the 10th
Amendment and the Commerce Clause. As noted by the Supreme Court in
United States v. Lopez, 514 U.S. 549 (1995), the Supreme Court in the
first half of the 19th century viewed the Commerce Clause as a limit on
state legislation that discriminated against interstate commerce. Now,
however, the Commerce Clause is viewed more as a grant of authority to
Congress. Id. at 556. That power has its limits; it ``may not be
extended so as to embrace effects upon interstate commerce so indirect
and remote that to embrace them, in view of our complex society, would
effectually obliterate the distinction between what is national and
what is local and create a completely centralized government.'' Id. at
557, quoting NLRB v. Jones & Laughlin Steel Corp., 301 U.S. 1, 37
(1937). But if an activity fits within one of the categories of
activity that Congress may regulate under its commerce power,\65\ or
other Constitutional authority, the regulation will be upheld.
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\65\ Those categories were articulated in Lopez as follows:
``First Congress may regulate the use of the channels of interstate
commerce. Second, Congress is empowered to regulate and protect the
instrumentalities of interstate commerce, or persons or things in
interstate commerce, even though the threat may come only from
intrastate activities. Finally, Congress' commerce authority
includes the power to regulate those activities having a substantial
relation to interstate commerce, i.e., those activities that
substantially affect interstate commerce. Id. at 558-59 (citiations
omitted)
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This year the U.S. Supreme Court affirmed per curiam that the
Commerce Clause permits Congress to regulate activity affecting
intrastate lending. In Citizens Bank v. Alafabco Inc., 123 S. Ct. 2037
(2003), the Court found that a debt restructuring agreement, involving
a national bank located in Alabama and an Alabama corporation, had a
sufficient nexus with interstate commerce to make an arbitration
provision in that agreement enforceable under the Federal Arbitration
Act, 9 U.S.C. 2. The Court stated, ``Congress' Commerce Clause power
`may be exercised in individual cases without showing any specific
effect upon interstate commerce' if in the aggregate the economic
activity in question would represent ``a general practice * * * subject
to federal control.' '' Citizens Bank, 123 S. Ct. at 2040 (emphasis in
original) (citations omitted). After articulating the reasons why the
debt restructuring agreements involved commerce within the meaning of
the Commerce Clause, the Court stated ``[n]o elaborate explanation is
needed to make evident the broad impact of commercial lending on the
national economy or Congress' power to regulate that activity pursuant
to the Commerce Clause.''\66\
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\66\ Citizens Bank, 123 St. 2041. See also Lewis v. BT
Investments Managers, Inc. 447 U.S. 27, 38-39(1980), (``[B]anking
and related financial activities are of profound local concern * * *
Nonetheless, it does not follow that these same activities lack
important interstate attributes''); Perez v. United States, 402 U.S.
146, 154 (1971) ``Extortionate credit transactions, though purely
intrastate, may in the judgment of Congress affect interstate
commerce'').
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Clearly, national bank operating subsidiaries, licensed by the OCC,
engaging in activities permissible for their parent national banks and
subject to the same terms and conditions are on the same footing for
purposes of the 10th Amendment. Given that they, like their parent
banks, engage in activities that have a substantial effect on
interstate commerce, regulation of the subsidiaries' activities would
be within Congress' authority under the 10th Amendment.
E. Description of the Final Rule
Based upon the foregoing discussion and analysis, the OCC has
adopted the final rule with certain modifications that do not alter the
fundamentals of the rule as proposed. We have amended the language in
Sec. 7.4000(a)(3) slightly to simplify it. In addition, we have
amended the regulation text in the final rule in Sec. 7.4000(b)(2).
This provision no longer makes reference to the specific powers of the
courts of justice ``to issue orders or writs compelling the production
of information or witnesses'' since this is implicit. In addition, we
have simplified the language which states that the exception for courts
of justice does not authorize states or other governmental entities to
exercise visitorial powers over national banks.
F. Regulatory Analysis
Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act, 5
U.S.C. 605(b) (RFA), the regulatory flexibility analysis otherwise
required under section 604 of the RFA is not required if the agency
certifies that the rule will not have a significant economic impact on
a substantial number of small entities and publishes its certification
and a short, explanatory statement in the Federal Register along with
its rule.
Pursuant to section 605(b) of the RFA, the OCC hereby certifies
that this final rule will not have a significant economic impact on a
substantial number of small entities. Accordingly, a regulatory
flexibility analysis is not needed. The amendments to the regulations
simply identify the scope of activities for which the agency's
visitorial powers are exclusive and clarify how an exception to such
powers applies. These amendments do not impose any new requirements or
burdens. As such, they will not result in any adverse economic impact.
[[Page 1903]]
Executive Order 12866
The OCC has determined that this final rule is not a significant
regulatory action under Executive Order 12866.
Unfunded Mandates Reform Act of 1995
Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.
104-4 (2 U.S.C. 1532) (Unfunded Mandates Act), requires that an agency
prepare a budgetary impact statement before promulgating any rule
likely to result in a Federal mandate that may result in the
expenditure by State, local, and tribal governments, in the aggregate,
or by the private sector of $100 million or more in any one year. If a
budgetary impact statement is required, section 205 of the Unfunded
Mandates Act also requires an agency to identify and consider a
reasonable number of regulatory alternatives before promulgating a
rule. The OCC has determined that this final rule will not result in
expenditures by State, local, and tribal governments, or by the private
sector, of $100 million or more in any one year. Accordingly, this
rulemaking is not subject to section 202 of the Unfunded Mandates Act.
Executive Order 13132
Executive Order 13132, entitled ``Federalism,'' (Order) requires
Federal agencies, including the OCC, to certify their compliance with
that Order when they transmit to the Office of Management and Budget
any draft final regulation that has Federalism implications. Under the
Order, a regulation has Federalism implications if it has ``substantial
direct effects on the States, on the relationship between the national
government and the States, or on the distribution of power and
responsibilities among the various levels of government.'' In the case
of a regulation that has Federalism implications and that preempts
state law, the Order imposes certain consultation requirements with
state and local officials; requires publication in the preamble of a
Federalism summary impact statement; and requires the OCC to make
available to the Director of the Office of Management and Budget any
written communications submitted by state and local officials. By the
terms of the Order, these requirements apply to the extent that they
are practicable and permitted by law and, to that extent, must be
satisfied before the OCC promulgates a final regulation.
In the proposal, we noted that the regulation may have Federalism
implications. It is not clear that the Order applies in situations
where an agency is implementing a statute that has preemptive effect.
Nevertheless, in formulating the proposal and the final rule, the OCC
has adhered to the fundamental Federalism principles and the Federalism
policymaking criteria.
Moreover, the OCC has satisfied the requirements set forth in the
Order for regulations that have Federalism implications and preempt
state law. The steps taken to comply with these requirements are set
forth below.
Consultation. The Order requires that, to the extent practicable
and permitted by law, no agency shall promulgate any regulation that
has Federalism implications and that preempts state law unless, prior
to the formal promulgation of the regulation, the agency consults with
state and local officials early in the process of developing the
proposed regulation. We have consulted with state and local officials
on the issues addressed herein through the rulemaking process.
Following the publication of the proposed rule, representatives from
the Conference of State Bank Supervisors (CSBS) met with the OCC to
clarify their understanding of the proposal and, subsequently, the CSBS
submitted a detailed comment letter regarding the proposal. Thirty-two
additional comments were also submitted on the proposal by other state
and local officials and state banking regulators. Pursuant to the
Order, we will make these comments available to the Director of the
OMB. Subsequent public statements by representatives of the CSBS have
restated their concerns, and CSBS representatives have further
discussed these concerns with the OCC on several additional occasions.
The Order requires a Federalism summary impact statement which
addresses the following in addition to the consultation discussed
above:
Nature of concerns expressed. The Order requires a summary of the
nature of the concerns of the state and local officials and the
agency's position supporting the need to issue the regulation. The
nature of the state and local official commenters' concerns and the
OCC's position supporting the need to issue the regulation are set
forth in the preamble, but may be summarized as follows. Broadly
speaking, the states disagree with our interpretation of the applicable
law, they are concerned about the impact the proposal will have on the
dual banking system, and they are concerned about the ability of the
OCC to protect consumers adequately.
Extent to which the concerns have been addressed. The Order
requires a statement of the extent to which the concerns of state and
local officials have been met. The concerns are addressed in order.
a. There is fundamental disagreement between state and local
officials and the OCC regarding the meaning of section 484 as well as
the Congressional intent behind the statute. The nature of the
disagreement is discussed at length in the materials that precede this
Federalism impact statement. For the reasons set forth in those
materials, we believe that the language of section 484, its legislative
history, and the application of that section by courts lead to the
conclusion that the OCC has exclusive visitorial authority to enforce
applicable state laws. The concerns of the state and local officials
could only be fully met if the OCC were to take a position that is
contrary to the express provisions of the statute and judicial
precedent. Nevertheless, to respond to some of the issues raised, the
language in the final regulation has been refined, and this preamble
further explains that the OCC's visitorial powers are exclusive with
respect to the Federally-authorized banking business of national banks.
b. Similarly, we fundamentally disagree with the state and local
officials about whether this proposal will undermine the dual banking
system. As set forth in the preamble, differences in national and state
bank powers and in the supervision and regulation of national and state
banks are not inconsistent with the dual banking system; rather they
are the defining characteristics of it. The dual banking system is
universally understood to refer to the chartering and supervision of
state-chartered banks by state authorities and the chartering and
supervision of national banks by Federal authority, the OCC. Thus, we
believe that the final rule preserves, rather than undermines, the dual
banking system.
c. Finally, we stand ready to work with the states in the
enforcement of applicable laws. The OCC has extended invitations to
state Attorneys General and state banking departments to enter into
discussions that would lead to a memorandum of understanding about the
handling of consumer complaints and the pursuit of remedies, and we
remain eager to do so.
We believe the OCC has the resources to enforce applicable laws, as
is evidenced by the enforcement actions that have generated hundreds of
millions of dollars for consumers in restitution, that have required
national banks to disassociate themselves from payday lenders, and that
have ordered national banks to stop abusive practices. These actions
are listed on the OCC's Web site at http://www.occ.treas.gov/
[[Page 1904]]
enforce/enf--search.htm. Indeed, as recently observed by the Superior
Court of Arizona, Maricopa County, in an action brought by Arizona
against a national bank, among others, the restitution and remedial
action ordered by the OCC in that matter against the bank was
``comprehensive and significantly broader in scope than that available
through [the] state court proceedings.'' State of Arizona v. Hispanic
Air Conditioning and Heating, Inc., CV 2000-003625, Ruling at 27,
Conclusions of Law, paragraph 50 (Aug. 25, 2003). Thus, the OCC has
ample legal authority and resources to ensure that consumers are
adequately protected.
List of Subjects in 12 CFR Part 7
Credit, Insurance, Investments, National banks, Reporting and
recordkeeping requirements, Securities, Surety bonds.
Authority and Issuance
0
For the reasons set forth in the preamble, the OCC amends part 7 of
chapter I of title 12 of the Code of Federal Regulations as follows:
PART 7--BANK ACTIVITIES AND OPERATIONS
0
1. The authority citation for part 7 continues to read as follows:
Authority: 12 U.S.C. 1 et seq., 71, 71a, 92, 92a, 93, 93a, 481,
484, 1818.
Subpart D--Preemption
0
2. In Sec. 7.4000:
0
a. Add a new paragraph (a)(3); and
0
b. Revise paragraph (b) to read as follows:
Sec. 7.4000 Visitorial powers.
(a) * * *
(3) Unless otherwise provided by Federal law, the OCC has exclusive
visitorial authority with respect to the content and conduct of
activities authorized for national banks under Federal law.
(b) Exceptions to the general rule. Under 12 U.S.C. 484, the OCC's
exclusive visitorial powers are subject to the following exceptions:
(1) Exceptions authorized by Federal law. National banks are
subject to such visitorial powers as are provided by Federal law.
Examples of laws vesting visitorial power in other governmental
entities include laws authorizing state or other Federal officials to:
(i) Inspect the list of shareholders, provided that the official is
authorized to assess taxes under state authority (12 U.S.C. 62; this
section also authorizes inspection of the shareholder list by
shareholders and creditors of a national bank);
(ii) Review, at reasonable times and upon reasonable notice to a
bank, the bank's records solely to ensure compliance with applicable
state unclaimed property or escheat laws upon reasonable cause to
believe that the bank has failed to comply with those laws (12 U.S.C.
484(b));
(iii) Verify payroll records for unemployment compensation purposes
(26 U.S.C. 3305(c));
(iv) Ascertain the correctness of Federal tax returns (26 U.S.C.
7602);
(v) Enforce the Fair Labor Standards Act (29 U.S.C. 211); and
(vi) Functionally regulate certain activities, as provided under
the Gramm-Leach-Bliley Act, Pub. L. 106-102, 113 Stat. 1338 (Nov. 12,
1999).
(2) Exception for courts of justice. National banks are subject to
such visitorial powers as are vested in the courts of justice. This
exception pertains to the powers inherent in the judiciary and does not
grant state or other governmental authorities any right to inspect,
superintend, direct, regulate or compel compliance by a national bank
with respect to any law, regarding the content or conduct of activities
authorized for national banks under Federal law.
(3) Exception for Congress. National banks are subject to such
visitorial powers as shall be, or have been, exercised or directed by
Congress or by either House thereof or by any committee of Congress or
of either House duly authorized.
* * * * *
John D. Hawke, Jr.,
Comptroller of the Currency.
[FR Doc. 04-585 Filed 1-12-04; 8:45 am]
BILLING CODE 4810-33-P